New state Department of Revenue guidelines will tax revenues from more hospital services

By GARRY RAYNOState House BureauSeptember 25. 2013 8:16PMCONCORD — New Department of Revenue Administration guidelines could cost Dartmouth-Hitchcock Medical Center $5 million this year according to hospital officials.

Hospital officials said the state's Medicaid Enhancement Tax penalizes the Dartmouth-Hitchcock Medical System because it integrates services between the hospital and its clinics.

Patients are best served by integrating services because it improves quality of care, said Tina Naimie, vice president of corporate finance, but integration makes otherwise non-taxable services, taxable for Dartmouth and other hospitals.

The DRA reached an agreement last year allowing hospitals to exempt revenue from laboratory and ambulance services, out-patient oncology programs and hospital-based physician compensation from their MET liability, she told the committee, but the new DRA guidelines include revenues from three of those areas — laboratory, ambulance and out-patient oncology services — in hospitals' tax liability.

Naimie told the committee Dartmouth and other integrated hospitals are taxed on the revenue they receive for those services, while private for-profit companies providing the same services are taxed on their profit.

The state taxes hospitals 5.5 percent on net patient revenue, while private providers pay the business enterprise and business profits taxes.

The disagreement over what out-patient services are covered by the tax dropped MET revenues from $200 million annually prior to fiscal year 2011, to $176 million in fiscal year 2012 and $185 million in 2013.

Budget writers predict the state will receive $185 million from the tax in fiscal year 2014 and $190 million in 2015.

Dartmouth Hitchcock director of government relations, former Sen. Matthew Houde, D-Meriden, told the commission the hospital paid $43 million in MET in fiscal year 2012 and $36 million in 2013. Hospitals pay this fiscal year's tax next month and Dartmouth expects it will owe $41 million or so.

"As a non-profit, we will have paid more than $100 million in MET over the last 26 months," Houde told the commission, but receive no state and federal money to help offset uncompensated care.

Houde noted the hospital provided $816.8 million in services it was not paid for through charity care, unpaid bills, underpayments for Medicaid care and other arranagements.

"That type of environment is not sustainable," Houde said, noting the hospital is willing to work with the state to help create a sustainable health care system statewide.

Commission member and DRA commissioner John Beardsmore said his department has been consistent and has not changed its guidelines. He noted his department followed state and federal law, as well as the state's Medicaid plan in developing the guidelines it issued earlier this month.

But representatives of the NH Hospital Association said some of the guidelines will be appealed and likely litigated.

Henry Lipman of Lakes Regional General Hospitals said the previous DRA commissioner said the MET was a self-reporting, or self-defined tax which meant the state's 26 hospitals developed their own ways of reporting. In areas where the new guidelines are consistent with the state Medicaid plan, there will be no problems, Lipman said, but where it is inconsistent they will be challenged. He said the key areas are laboratory and ambulance services, emergency room physician fees, rural health clinic revenue and "swing beds" for patients who initially need acute care but eventually move to nursing home-level care.

The state contends all hospital in- and out-patient services that Medicaid reimburses should be taxed whether Medicaid, an insurance company or an individual pays for the services.

Hospitals say only the Medicaid payments are taxable, and also claim such things as laboratory fees, x-rays, physical therapy and professional services should be exempt. The state and hospitals generally agree on in-patient services subject to the tax.

The MET began in 1991 as a way to match federal money to pay the state's share for Medicaid services. The state then returned the hospitals' MET money through the Disproportional Share Hospital program to help hospitals that treat large numbers of Medicaid patients.

But in 2011 the federal government said states had to distribute the money based on a hospital's Medicaid costs, not simply return the money.

At the same time, lawmakers stopped reimbursing the state's largest hospitals for uncompensated care, although the program continued for small rural hospitals.

Since then hospitals have sought to minimize their tax liability. The state uses the money to pay Medicaid providers, to reduce uncompensated care and to fund other state programs. Ten of the state's largest hospitals sued the state over changes to its Medicaid program. The suit is still pending in federal court. Several hospitals also filed suit in Hillsborough County Superior Court saying the MET is unconstitutional.

The commission is studying whether the MET needs to be changed to make it more predictable for budget writers. It will issue a report by the end of October.